Role of the Owner
Small businesses rely heavily on the talents, skills, and drive of the company’s owner or owners. Whether called a proprietor, partner, or shareholder, the owner plays a central role in the successful operation of the business. Frequently, the owner’s input is an indispensable part of the business plan. In return, the owner typically derives most of his or her income from the business. This synergistic relationship poses serious challenges for the estate planner.
Can the business survive the death of the owner?
For many small businesses, the value of the enterprise is a direct extension of the owner’s skills and desire. In many cases, these unique talents are irreplaceable. The answer to this question shapes the entire business succession plan — and drives the keep-or-sell decision explored on the next page.
When the Business Cannot Survive
Some businesses are so closely tied to the owner’s unique talents that their value cannot be preserved after death. Charles Schulz, the creator of the Peanuts® comic strip, announced that the strip would end upon his death or retirement. Certainly the multimillion-dollar value of the strip and its characters — Charlie Brown, Snoopy, and the rest — were assets worth preserving. Yet the strip could not survive the death of its creator and sole illustrator. Mr. Schulz decided it couldn’t, and a very valuable business operation ended upon his death. Fortunately, he left behind valuable trademarks to provide his heirs with significant royalty income — but the continuing business operation itself ended.
When a Successor Can Be Groomed
Not all businesses rely on highly unique and irreplaceable talents. Business owners can often groom a successor to carry on the business upon the owner’s death, disability, or retirement. However, even with a capable successor in place, the business must overcome the loss of the owner’s contribution in terms of time and labor. This is especially critical if the owner’s family depends on the business for financial support.
After the owner’s death, the business must now support both the owner’s family and the successor — all without the labor and talents of the original owner. Replacing an owner is costly. The estate planner must consider what steps can be taken to replace the owner’s contributions, and how much that will cost the business going forward.
Case Study — Frank & Jerry’s Painting Business
Frank and Jerry are partners. Both are 45 years old, lifelong friends who started a house painting business after graduating from high school. The business has grown steadily and now employs three full crews.
Frank is the natural salesman — adept at bidding, hobnobbing with general contractors and local developers who bring in work. Jerry handles the other side: scheduling crews, buying supplies, and supervising the quality of the work.
Both partners are married with young children. Both rely on the business to support their families if “something should happen.”
What happens if either partner dies?
- Could the surviving partner assume the other partner’s responsibilities?
- If not, how much would it cost to hire a competent replacement — and can the business afford it?
- If a replacement is hired, the business must now support the surviving partner, the deceased partner’s family, and the replacement. Can it?
- If the surviving partner can handle both roles, how would he feel doing all the work while splitting profits with the deceased partner’s family?
- Would business profits be paid out as income to the surviving family, or reinvested for growth? These two groups have very different priorities.
- Would a young mother whose husband died have to choose between raising her children and stepping in to run the business?
These are serious questions that form the basis of the keep-or-sell decision — the subject of the next page. The answers depend on an honest assessment of the business’s ability to survive without its owner, the heirs’ capabilities and desires, and the financial needs of all parties involved.